Can the ECB’s Efforts Make the Eurozone a Safer Investment?

Say what you will about Mario Draghi, President of the European Central Bank (ECB), he’s no quitter. He simply will not give up on the grand economic vision of the eurozone that was presented when the region was formed in 1999—in spite of all of the shortcomings we have seen.

His policies and their effects should make you think twice before investing in anything from the eurozone for quite some time.

Now the question is not whether Draghi can turn around the fortunes of the region, but whether his policies are a realistic plan for economic recovery.

In his recent speech to the French government, Draghi tried to calm the country’s nerves. It’s well-known that France has seen its economic recovery suffer as a result of its alliance in the eurozone.

Draghi said that the ECB will continue to support whatever is necessary to fix the eurozone and that the loose monetary policy will continue: “On our policy stance, let me say that it’s been accommodative in the past, it is accommodative in the present time and will stay accommodative for the foreseeable future,” said Draghi. (Source: European Central Bank web site, last accessed June 26, 2013.)

Draghi is certainly making an honest effort, but sometimes enough is enough. He just has not led the eurozone to an effective economic recovery. As I have said on numerous occasions in the past, the eurozone is a major financial mess and looks only to get worse if policies don’t change.

There are only two strong pillars, Germany and France, holding up the eurozone house—and the roof has major structural damage and the foundation is crumbling.

There are still six member countries in recession and the eurozone as a whole is gripped in recession. Germany and France are seeing their own economic recoveries impacted by their responsibility to save weaker members.

Those weak economies will continue to drag down the eurozone’s economic recovery, which will take even more money from the ECB to resolve, making investments in the eurozone far less attractive.

Don’t expect Greece or Portugal to have healthy economies again for decades. Italy and Spain aren’t that far ahead of them, either. The unemployment rate is higher than 12% in the eurozone as a whole, and more than 25% in both Greece and Spain.

We have seen marches in the streets of Athens and Rome to protest government austerity programs. The citizens living there don’t seem to understand that their countries have been riding the tide of easy money and horrible fiscal management for years.

Spain has not yet asked for emergency capital from the ECB, but that eventuality may be right around the corner in light of its lackluster economic recovery.

But even Draghi admits the ECB can do only so much.

“Similarly, monetary policy cannot create real economic growth. If growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix,” said Draghi in his speech. (Source: Ibid.)

The bottom line is the eurozone is not an easy fix and will take years for the economic recovery to resolve. In the meantime, watch its impact on the global economy, and resist any urge to invest in companies affected by it.

One segment that comes to my mind includes global automakers like Ford Motor Company (NYSE/F). As the economic slowdown continues in the region, consumer demand will decline. With 12.2 million people unemployed in the region, and savings running out, fewer people will be looking to buy new cars.

Other U.S. companies that depend on European sales, like Caterpillar Inc. (NYSE/CAT), will also take a hit from the deepening eurozone crisis.

And finally, the big banks have deep exposure to the eurozone; any long-term malaise in Europe will certainly affect them as well.

George Leong, B. Comm. is a Senior Editor at Daily Gains Letter, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research... View full profile ›